Cooks Coffee's Capital Efficiency Turnaround: Assessing Sustainable Growth in a Competitive Market

Cooks Coffee (NZSE:CCC) has emerged from a prolonged period of unprofitability to demonstrate notable improvements in capital efficiency, marked by a rising Return on Invested Capital (ROIC) and strategic operational expansion. As of March 2025, the company's ROCE reached 3.5%, up from losses in prior years, while same-store sales growth in the UK and Ireland averaged 3.5% and 6.4%, respectively, during the 26 weeks ending September 2025, according to ROIC data (https://www.alphaspread.com/security/nzx/ccc/profitability/ratio/return-on-invested-capital). These metrics suggest a turnaround in capital utilization, but investors must scrutinize whether this momentum is sustainable amid structural challenges noted by industry commentators and market summaries.

Capital Efficiency and Operational Turnaround

Cooks Coffee's ROCE trajectory reflects a deliberate focus on optimizing capital allocation. After years of operating at a loss, the company's ROCE hit 4.7% in September 2024 and 3.5% in March 2025, albeit below the 7.9% industry average for the hospitality sector, as discussed in recent market write-ups. This improvement aligns with a 65% increase in capital employed since 2020, indicating aggressive reinvestment in store expansion and operational infrastructure. For context, the company's franchisee store sales in the UK and Ireland surged 33% to NZ$79.6 million in FY25, driven by a 38% rise in UK sales and 22% growth in Ireland, a performance highlighted in corporate announcements. Such expansion has been supported by a new banking arrangement with the Bank of New Zealand (BNZ), which reduced interest costs and stabilized debt servicing, according to the company's preliminary results.

However, the stock's 67% decline over five years raises questions about market confidence. While management attributes this to broader industry headwinds, analysts must consider whether Cooks Coffee's capital efficiency gains are sufficient to justify long-term optimism. For instance, its ROCE of 3.5% remains vulnerable to rising interest rates or margin compression in its franchise model, where unit economics depend heavily on third-party operators.

Strategic Expansion and Unit Economics

The company's growth strategy hinges on geographic diversification and store-level optimization. As of March 2025, Cooks Coffee operated 93 stores in the UK and Ireland, with a target of 300 by 2034, according to the preliminary results. New store openings-11 in the UK and two in Ireland during the 26 weeks ending September 2025-have contributed meaningfully to sales, with new locations accounting for 34.6% of total UK sales in the first ten weeks of FY25, per the company's trading updates. This suggests a strong correlation between expansion and revenue growth, supported by same-store sales increases of 6.3% in the UK and 2.9% in Ireland for the six months ending September 2024.

Unit economics also appear robust. EBITDA surged to NZ$1.4 million in FY25 from NZ$336,000 in FY24, driven by cost discipline and higher sales. Operating costs for franchised stores fell to NZ$78,000 from NZ$123,000 the prior year, while the BNZ refinancing reduced interest burdens. These improvements underscore the company's ability to scale profitably, though sustainability will depend on maintaining margins as competition intensifies in the UK and Ireland's coffee markets.

Risks to Scalability and Investor Considerations

Despite these positives, several risks could undermine Cooks Coffee's growth narrative. First, its ROCE of 3.5% lags behind industry peers, implying limited excess returns for capital holders. Second, the franchise model's reliance on third-party operators introduces variability in service quality and operational consistency, which could erode customer loyalty. Third, the company's aggressive expansion into 300 stores by 2034 assumes sustained demand in suburban and market town locations, where foot traffic may plateau as urbanization trends shift, as noted in a PwC analysis (https://www.pwc.co.uk/industries/retail-consumer/insights/store-openings-and-closures.html).

Moreover, the stock's steep decline-despite strong financial results-highlights market skepticism. While management cites structural challenges in the hospitality sector, investors should assess whether Cooks Coffee's capital efficiency gains are translating into shareholder value. For example, the company's ROIC of 4.1% (based on recent financial statements) suggests returns are still below the cost of capital for many investors, particularly in a low-growth environment.

Conclusion: A Cautious Bull Case

Cooks Coffee's improving ROCE and operational metrics present a compelling case for capital-efficient growth. The company's strategic focus on high-potential locations, sustainability initiatives, and cost optimization has driven strong sales and EBITDA growth. However, investors must weigh these positives against structural risks, including a subpar ROCE relative to peers and the stock's underperformance over the past five years.

For those willing to take a long-term view, Cooks Coffee's expansion into India via a Master Franchise Agreement and its disciplined capital allocation strategy could unlock value. Yet, the path to 300 stores by 2034 will require consistent execution, margin resilience, and the ability to differentiate in a crowded market. As CEO Aiden Keegan notes, the company is "well on track" to its goals, but the true test of its scalability lies in sustaining these returns without compromising capital efficiency.